ID: 1805.08544

Impact of Contingent Payments on Systemic Risk in Financial Networks

May 22, 2018

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Contingent Capital with Stock Price Triggers in Interbank Networks

November 12, 2020

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Anne G. Balter, Nikolaus Schweizer, Juan C. Vera
General Economics
Economics

This paper studies existence and uniqueness of equilibrium prices in a model of the banking sector in which banks trade contingent convertible bonds with stock price triggers among each other. This type of financial product was proposed as an instrument for stabilizing the global banking system after the financial crisis. Yet it was recognized early on that these products may create circularity problems in the definition of stock prices - even in the absence of trade. We find...

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Systemic Risk: Fire-Walling Financial Systems Using Network-Based Approaches

December 11, 2019

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V. Sasidevan, Nils Bertschinger
Trading and Market Microstru...
Statistical Finance

The latest financial crisis has painfully revealed the dangers arising from a globally interconnected financial system. Conventional approaches based on the notion of the existence of equilibrium and those which rely on statistical forecasting have seen to be inadequate to describe financial systems in any reasonable way. A more natural approach is to treat financial systems as complex networks of claims and obligations between various financial institutions present in an eco...

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Endogenous Distress Contagion in a Dynamic Interbank Model

November 28, 2022

86% Match
Zachary Feinstein, Andreas Sojmark
Mathematical Finance
Probability
General Finance
Risk Management

In this work we introduce an interbank network with stochastic dynamics subject to an endogenous notion of distress contagion that accounts for worries about future defaults within the network. Specifically, this entails a forward-backward approach to the equilibrium dynamics, enforced by a mark-to-market valuation adjustment for interbank claims, whereby the conditional probabilities of future defaults are required to determine today's balance sheets. Distinct from static mo...

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Contingent Convertible Obligations and Financial Stability

June 1, 2020

86% Match
Zachary Feinstein, T. R. Hurd
Risk Management
Mathematical Finance

This paper investigates whether a financial system can be made more stable if financial institutions share risk by exchanging contingent convertible (CoCo) debt obligations. The question is framed in a financial network model of debt and equity interlinkages with the addition of a variant of the CoCo that converts continuously when a bank's equity-debt ratio drops to a trigger level. The main theoretical result is a complete characterization of the clearing problem for the in...

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Systemic Risk in Financial Systems: Properties of Equilibria

February 22, 2022

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John Stachurski
Mathematical Finance
Risk Management

Eisenberg and Noe (2001) analyze systemic risk for financial institutions linked by a network of liabilities. They show that the solution to their model is unique when the financial system is satisfies a regularity condition involving risk orbits. We show that this condition is not needed: a unique solution always exists.

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Contagion and Stability in Financial Networks

March 13, 2016

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Seyyed Mostafa Mousavi, Robert Mackay, Alistair Tucker
Computational Finance
Risk Management

This paper investigates two mechanisms of financial contagion that are, firstly, the correlated exposure of banks to the same source of risk, and secondly the direct exposure of banks in the interbank market. It will consider a random network of banks which are connected through the inter-bank market and will discuss the desirable level of banks exposure to the same sources of risk, that is investment in similar portfolios, for different levels of network connectivity when pe...

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Optimization of Fire Sales and Borrowing in Systemic Risk

February 12, 2018

86% Match
Maxim Bichuch, Zachary Feinstein
Mathematical Finance
Risk Management

This paper provides a framework for modeling financial contagion in a network subject to fire sales and price impacts, but allowing for firms to borrow to cover their shortfall as well. We consider both uncollateralized and collateralized loans. The main results of this work are providing sufficient conditions for existence and uniqueness of the clearing solutions (i.e., payments, liquidations, and borrowing); in such a setting any clearing solution is the Nash equilibrium of...

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Dynamic Interventions for Networked Contagions

May 26, 2022

85% Match
Marios Papachristou, Siddhartha Banerjee, Jon Kleinberg
Social and Information Netwo...
Computer Science and Game Th...
Systems and Control
Systems and Control
Physics and Society

We study the problem of designing dynamic intervention policies for minimizing networked defaults in financial networks. Formally, we consider a dynamic version of the celebrated Eisenberg-Noe model of financial network liabilities and use this to study the design of external intervention policies. Our controller has a fixed resource budget in each round and can use this to minimize the effect of demand/supply shocks in the network. We formulate the optimal intervention probl...

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Derivatives and Credit Contagion in Interconnected Networks

February 14, 2012

85% Match
Sebastian Heise, Reimer Kuehn
Risk Management

The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, {\em but also} by directly triggering each other through contagion. Although credit default swaps have radically altered the dynamics of contagion for more than a decade, models quantifying their impact on systemic risk are still missing. Here, we examine contagion thro...

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Price-mediated contagion with endogenous market liquidity

November 10, 2023

85% Match
Zhiyu Cao, Zachary Feinstein
Risk Management
Mathematical Finance

Price-mediated contagion occurs when a positive feedback loop develops following a drop in asset prices which forces banks and other financial institutions to sell their holdings. Prior studies of such events fix the level of market liquidity without regards to the level of stress applied to the system. This paper introduces a framework to understand price-mediated contagion in a system where the capacity of the market to absorb liquidated assets is determined endogenously. I...

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